Recent developments to mandatory examinations: Things you should know.

  • 9 Mar 2022
  • 9 Mar 2022
What’s the background?
Under section 596A of the Corporations Act 2001 (Cth), an eligible applicant can apply to the Court and the Court can, in turn, summon an officer of a company under external administration for examination about the company’s affairs.

In 2018, a number of shareholders of Arrium obtained the ‘eligible applicant’ status from ASIC to apply for mandatory examination of a former director of Arrium. In the following year, under section 596A, the Arrium shareholders were able to obtain examination orders against the former director.

However, if the application for examination was made for an improper purpose (outside of the statutory purpose), the application would have been an abuse of process. Thus, Arrium, its auditors, advisers and the former director sought to challenge the examination orders on this basis (abuse of process - being outside the statutory purpose).
What was the Court of Appeal’s decision?
The Court of Appeal did, as Arrium had hoped, decide to dismiss the examination orders. This decision was made on the basis that it was found that the predominant purpose of the examination was to investigate a class action for a limited number of shareholders of Arrium, i.e. a ‘private purpose’, as opposed to a purpose which would have directly benefitted the company, its creditors or contributories. Thus, according to law, the application was an abuse of process.
Moving to the High Court:
Unsatisfied with the results, Arrium shareholders eventually appealed to the High Court of Australia.

In allowing the appeal, the High Court, by majority (3-2), held that it was actually not an abuse of process for the Arrium shareholders (as eligible applicants) to use the mandatory examination under section 596A for the purpose of investigating a class action. Stating that Section 596A is not limited to examinations only for the purpose of benefitting the company, creditors or contributories. Rather, the statutory purpose of the provision is broader.

Pursuing recovery of lost money due to corporate misconduct (of directors and officers for example) is in the public interest, as it protects company stakeholders and promotes compliance with the law and is thus within purpose.

Furthermore, ASIC’s original granting of ‘eligible applicant’ status to the Arrium shareholders supports the position that the examination is in service of a public function, and would therefore not be an abuse of process.  
What are the implications of the High Court’s decision?
The High Court’s decision confirms that the statutory purposes for mandatory examination are not limited to only those benefitting the company, instead, eligible applicants for mandatory examinations can include a group of shareholders, and the statutory purposes for which mandatory examinations may be utilised have been broadened.

The decision means that directors and officers of companies may potentially face mandatory examination at the hands of shareholders more frequently and regardless of whether the purpose confers a demonstrable benefit to the company, its creditors or contributories.

The decision may also mean an increase in approaches to ASIC for ‘eligible applicant’ status, which is a key element to be obtained.

In terms of class actions, the decision adds to the arsenal of ways to expose and access information which may have otherwise not been previously available. This may increase shareholder class action risk for directors and officers.
The Hicksons team is ready to provide expert support on the developments.

Post by Hicksons Partner, Marc Rossi, Senior Associate, Roxanna Lam and Solicitor, Mahnaz Bokan.

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